It's a policy (according to Barney Frank) to lose money on purpose, right?
Well then Fannie Mae ought to get some sort of award:
Fannie Mae, operating under a federal conservatorship, said it will seek $15 billion in aid from the U.S. Treasury as its ninth straight quarterly loss once again drove the mortgage-finance company’s net worth below zero.
A third-quarter net loss of $18.9 billion, or $3.47 a share, pushed the company to request its fourth draw on a $200 billion lifeline from the government, Washington-based Fannie Mae said in a filing today with the Securities and Exchange Commission.
Let's face it. They're bankrupt. They've been bankrupt. They continue to become more bankrupt, despite being under "conservatorship" for more than a year!
Now let's first and foremost deal with what Fannie IS. From their 10Q:
Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Fannie Mae has a public mission to support liquidity and stability in the secondary mortgage market, where existing mortgage loans are purchased and sold. We securitize mortgage loans originated by lenders in the primary mortgage market into mortgage-backed securities that we refer to as Fannie Mae MBS, which can then be bought and sold in the secondary mortgage market. We also participate in the secondary mortgage market by purchasing mortgage loans (often referred to as “whole loans”) and mortgage-related securities, including our own Fannie Mae MBS, for our mortgage portfolio. In addition, we make other investments that increase the supply of affordable housing. Under our charter, we may not lend money directly to consumers in the primary mortgage market. Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.
Got that? This will become important later.
We recorded a net loss of $18.9 billion for the third quarter of 2009. Including $883 million in dividends on the senior preferred stock, the net loss attributable to common stockholders was $19.8 billion, or $3.47 per diluted share.
Note that in addition to losing $19 billion through operations, they also had to pay $883 million in dividends for the existing "draw" on their Treasury credit line. They propose to expand that by about 30%, which will of course increase their dividend expense on that draw by an equivalent amount, causing it to reach approximately $1.2 billion dollars next quarter.
The impact of these items more than offset our net revenues of $5.9 billion generated primarily from net interest income and guaranty fee income.
These dividends will reach approximately 20% of their net fee and guarantee income next quarter. This is an enormous (and effectively permanent) expense that will only expand so long as they continue to lose money.
In comparison, we recorded a net loss of $14.8 billion for the second quarter of 2009.
Operating losses are increasing sequentially, not stabilizing or receding.
The "serious delinquency rate" (loans three or more months past due) has continued to accelerate. In the third quarter it accelerated to 4.72% of Fannie's entire book of business (some $3.2 trillion) When one considers that older loans that become delinquent result in the immediate sale of the property and satisfaction of the note (since the home has positive equity) the magnitude of the disaster in play here becomes clear.
To put this in perspective, non-performing loans accelerated by 19.8% in the third quarter. In the second quarter the rate of acceleration was 25%, in the first quarter it was 30%, and in the last quarter of 2008 it was 40%.
This looks like a "better" rate of change but that is only because the original numbers were so small (1.72% originally.) In point of fact the "usual" default rate on their credit book has been around 1%, and was in the first quarter of 2008 (1.15%); as such the catastrophe should be clear in that the "serious delinquency" rate is now some 410% what it was in the first quarter of 2008!
Fannie also likes to keep some of their credit exposure "off balance sheet." Indeed, in the third quarter of 2009 they had almost $164 billion dollars of seriously delinquent loans off balance sheet, as opposed to $33.5 billion that are on the balance sheet formally. They are holding 72,275 foreclosed properties, up about 10,000 from what had been a very stable 62,000ish number since the fourth quarter of 2008.
Now let's talk about these "off-balance sheet" MBS. What does the footnote to that table say on Page 5? This:
Represents unpaid principal balance of nonperforming loans in our outstanding and unconsolidated Fannie Mae MBS held by third parties, including first-lien loans associated with unsecured HomeSaver Advance loans that are not seriously delinquent.
Who are those third parties? Do they include this particular this particular third party?
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities.
Just curious....
Now let's talk about Fannie's problems with their mortgages. I found this paragraph interesting:
We are experiencing increases in delinquency and default rates throughout our guaranty book of business, including on loans with fewer risk layers, such as loans with lower original loan-to-value ratios, higher FICO credit scores and mortgages with fixed rate mortgage terms.
This is bad. Loans that were formerly considered "safe" are defaulting. That is, they're not "safe".
Risk layering is the combination of multiple risk characteristics that could increase the likelihood of default. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices. Certain loan categories continued to contribute disproportionately to the increase in nonperforming loans and credit losses for the third quarter and first nine months of 2009. These categories include: loans on properties in the Midwest, California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans related to higher-risk product types, such as Alt-A loans. The term “Alt-A loans” generally refers to mortgage loans that can be underwritten with reduced or alternative documentation than that required for a full documentation mortgage loan but may also include other alternative product features. In reporting our credit exposure, we classify mortgage loans as Alt-A if the lenders that delivered the mortgage loans to us classified the loans as Alt-A based on documentation or other product features.
So if a lender didn't classify a loan as "Alt-A" or otherwise risky, according to Fannie, it wasn't. How much attention was paid to whether or not those loans sold to Fannie were properly classified by the sellers? Countrywide Financial anyone? Note that a federal judge has ruled that Countrywide's Mozilo must face securities fraud charges for:
The SEC sued the defendants in June, accusing them of misleading investors about the quality of Countrywide's loans, including tens of billions of dollars of risky subprime and adjustable-rate mortgages.
"The specific allegations of the complaint relied on by the SEC describe in great detail the virtual abandonment of prudent underwriting guidelines and the resulting proliferation of poor quality loans, during the same period Countrywide was touting the superior quality of its underwriting guidelines and its loan portfolio," the judge wrote.
How many of those are (as constituents of MBS) sitting on Fannie's balance sheet (and off) and are in fact a rotting fish instead of the claimed "quality, prime loans"?
Under the senior preferred stock purchase agreement, as amended, Treasury committed to provide us with funds of up to $200 billion under specified conditions. The agreement requires Treasury, upon the request of our conservator, to provide funds to us after any quarter in which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP balance sheet).
The problem with drawing the entire facility is that it would make it almost impossible for Fannie to turn a profit. Indeed, if you look at the above original statement, multiplying the preferred dividend by five (roughly what would be involved) would result in a quarterly dividend payment that would consume nearly all of the free cash flow of the company.
This presumes zero credit loss. But that is improbable beyond all reason - even in an ordinary economy a 1/2% loss rate is reasonable and expected (1% default rate and recovery of 50 or so on the defaults, after all expenses, or 1.5% default rate and a recovery of 70ish.) On a $3 trillion credit book this implies an annualized $15 billion in credit losses. The firm not only has to post sufficient net earnings to cover this, but also has to cover the dividends that are roughly $5 billion a year (as of now with the new draw); that is, it must post more than $20 billion in earnings a year just to break even, and that doesn't retire any of the debt.
At least they're honest about this:
Our senior preferred stock dividend obligation, combined with potentially substantial commitment fees payable to Treasury starting in 2010 (the amounts of which have not yet been determined) and our effective inability to pay down draws under the senior preferred stock purchase agreement, will have a significant adverse impact on our future financial position and net worth.
My analysis: NO KIDDING!
Now on to The Fed and the intertwined snake pit between it, The Federal Government and Fannie:
In response to the strong demand that we experienced for our debt securities during the first nine months of 2009, we issued a variety of non-callable and callable debt securities in a wide range of maturities to achieve cost-efficient funding and an appropriate debt maturity profile. In particular, we issued a significant amount of long-term debt during this period, which we then used to repay maturing debt and prepay more expensive long-term debt. As a result, as of September 30, 2009, our outstanding short-term debt, based on its original contractual term, decreased as a percentage of our total outstanding debt to 30%, compared with 38% as of December 31, 2008. In addition, the average interest rate on our long-term debt (excluding debt from consolidations), based on its original contractual term, decreased to 3.76% as of September 30, 2009, compared with 4.66% as of December 31, 2008.
The Fed bought all they could get their hands on. Must be nice, eh?
Accordingly, we believe that continued federal government support of our business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the government’s support of us or the markets could lead to an increase in our debt roll-over risk in future periods and have a material adverse effect on our ability to fund our operations. Demand for our debt securities could decline in the future if the government does not extend or replace the Treasury credit facility, which expires on December 31, 2009, as the Federal Reserve concludes its agency debt and MBS purchase programs during the first quarter of 2010, or for other reasons.
Uh, how do they intend to replace those facilities? We're talking about three and six months hence here folks!
Now on to their "help"....
On average, borrowers who refinanced during the quarter through our Refi Plus initiatives reduced their monthly mortgage payments by $154.
Well that's better than nothing, but you might try explaining how someone who has had their payments double - or more - is going to be kept from foreclosure by a $154 decrease in their monthly "nut." While any decrease is better than none, to believe that people are losing their homes over $150 a month is likely a losing bet.
Now let's talk about The Fed and the impact of it's programs. Specifically:
The $649.9 billion in new single-family and multifamily business for the first nine months of 2009 consisted of $392.2 billion in Fannie Mae MBS that were issued,
It is rather clear that The Fed is buying more than "the entire market" of new issue thus far, since only $400 billion (roughly) of new issue into the market occurred. The rest was retained on balance sheet, and The Fed has been buying Fannie debt issues that are used to fund that as well.
In other words, The Fed is not a participant in the market, it IS the market.
We expect that our credit losses and credit loss ratio will continue to increase during the remainder of 2009 and during 2010 as a result of the continued high unemployment we have experienced and an expected increase in our charge-offs as we foreclose on seriously delinquent loans for which we are not able to provide a sustainable workout solution.
Fannie sees continued deterioration in the macro economic environment that bears on consumer mortgage performance.
This is in STARK CONTRAST to the media pumpers and pundits, all of whom are claiming that "the worst is behind us" for the economy. Since consumers are 70% of the overall economy, it is simply impossible for both of these views to be correct.
Fannie has more current and more topical information on the performance trends in their book than any of the media folks.
Guess who is more likely to be right, and who has nothing to sell you under the rubric of "hope"?
Fannie also has $47 billion of ALT-A and other "garbage" securities for which there is no market price (under "Level 3".) What are those really worth? Good question - and we also don't know what their acquisition cost was. Surprisingly (pleasantly so) there are few derivatives on their book.
In short while Fannie has managed to increase its interest and fee income dramatically (some 77% over last year) it hasn't mattered, as credit losses have risen at a stagging 246% over the same time period.
This is an organization that is going to die on it's present course. Only extraordinary intervention has kept it from happening thus far, but that intervention has imposed a bone-crushing liability in the form of dividend payments - a liability that will only increase as the line is further drawn down.
It appears that the original $200 billion line was set not with an eye toward what the firm could ultimately sustain and pay down, but rather with the singular goal of assuaging the financial markets at that instant in time. This, as we all know, was an utter failure, as the line was extended in the spring and summer of 2008, yet the market melted in the fall anyway.
Worse, we have now embedded The Federal Reserve in this charade, with them buying debt and MBS that under the black letter of the law appears to be flatly impermissible. I cite Section 14 of The Federal Reserve Act:
Purchase and Sale of Cable Transfers, Bank Acceptances and Bills of Exchange
Any Federal reserve bank may, under rules and regulations prescribed by the Board of Governors of the Federal Reserve System, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank.
This paper is not a cable transfer, bankers' acceptance of a bill of exchange. This section thus does not apply.
(a) To deal in gold coin and bullion at home or abroad
They are not gold.
Nor does this paper qualify under:
Purchase and Sale of Bills of Exchange
(c) To purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of commercial transactions, as hereinbefore defined;
Again, these are not bills of exchange. This leaves us with:
Purchase and Sale of Obligations of United States, States, Counties, etc., and of Foreign Governments
(b)
- To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners' Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.
- To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.
These notes and debt instruments have maturities exceeding the limits specified; therefore, the debt must carry the full faith and credit of the United States as to principal and interest.
But again, according to the 10Q:
Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.
Treasury has the authority (under the laws passed by Congress) to prop up Fannie and Freddie in this fashion, ill-advised though it may be, and inextricable though it may be given their credit position, earnings power, and required dividend payments.
THE FED, HOWEVER, HAS NEVER HAD AND STILL DOES NOT HAVE THE AUTHORITY TO BUY EITHER FANNIE'S MBS OR ITS DEBT! THE ENTIRETY OF THAT $1.2 TRILLION DOLLAR PROGRAM CONTINUES TO APPEAR TO BE, AS I HAVE REPEATEDLY ASSERTED, ENTIRELY BEYOND THE LAWFUL CONFINES OF THE FEDERAL RESERVE'S AUTHORITY.
Fannie, by its own disclosure in this 10Q, is surviving ONLY due to the extraordinary acts of Treasury and, I would argue, the blatantly impermissible acts of The Federal Reserve. Fannie has turned into nothing more than a politically-motivated toxic waste receptacle, first abused by Countrywide (and others, assuming the SEC's complaint against Mozilo is valid) and now by the FHA! This is a black hole that has consumed almost $1 trillion dollars of taxpayer money thus far. Worse, there is no viable exit strategy on the table nor can there be under the current course we are on.
THIS CHARADE MUST STOP AND THE GSE'S MUST BE RESOLVED.
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